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The American Rescue Plan and the Nanny Tax

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Paying a nanny – or any other household employee like a housekeeper or senior caregiver – “on the books” is always the legal and right thing to do. Despite the steep risks for your clients getting caught out of compliance, some resistance to legal pay can be attributed to the costs of doing it right. The American Rescue Plan offers some relief.

Apr 5th 2021
Founder and CEO GTM Payroll Services
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With the tax cuts in the American Rescue Plan reducing the costs of childcare for families, your clients may actually save money by paying their nannies legally if they are not doing so already. Tax breaks, including those in pandemic relief legislation, are obviously not available to families who pay “under the table.”

If there was ever a time for your clients to start paying their nannies the right way, it is now. Here’s why:

Increased Contribution Limits to Dependent Care FSAs

The American Rescue Plan boosts the Dependent Care FSA contribution limit from $5,000 to $10,500 for 2021. These accounts allow tax-free reimbursements for qualified child care expenses like wages paid to a nanny, lowering taxable income so less is paid in Social Security, Medicare and federal income taxes (state taxes too if applicable).

Tax savings from funds placed in a Dependent Care FSA can typically range from 32 to 46 percent. If your client has a full-time nanny (or even a part-time caregiver) they can max out their contribution and save anywhere from $3,400 - $4,800.

Expanded Child and Dependent Care Tax Credit

Under the American Rescue Plan, the Child and Dependent Care Tax Credit will increase from $3,000 to $8,000 for a family with one child. For families with two or more children, the credit increases from $6,000 to $16,000.

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